Amazon’s secret algorithm boosted internet-wide prices, generating $1 billion.

The Federal Trade Commission (FTC) filed a lawsuit against Amazon last week, accusing the online retail giant of illegally maintaining a monopoly. The FTC’s complaint contained redacted portions, but The Wall Street Journal recently revealed crucial details hidden within those redactions, particularly concerning a covert algorithm. According to the FTC, Amazon had employed this algorithm in the past to increase prices on popular online shopping platforms.

Sources with knowledge of the FTC’s complaint disclosed that the saga began when Amazon developed an algorithm code-named “Project Nessie.” This algorithm allegedly manipulated the pricing algorithms of its competitors, forcing them into higher price points. The controversial algorithm was reportedly in use for several years and contributed to Amazon’s enhanced profitability across various shopping categories while prompting rivals to raise their prices, resulting in customers paying more, as reported by the WSJ.

The FTC’s complaint stated that Amazon leveraged its extensive surveillance network to stifle price competition. This involved detecting and discouraging discounting, artificially inflating prices both on and off Amazon’s platform, and hindering rivals from achieving scale through lower pricing.

Although the FTC had redacted this information in its complaint, sources revealed to the WSJ that Amazon generated “more than $1 billion in revenue” through Project Nessie, while competitors discovered that reducing prices did not translate into increased market share or scale, but rather led to diminished profit margins, according to the FTC’s allegations.

Consequently, the FTC asserted that Amazon effectively taught its competitors that lower prices were unlikely to result in increased sales, contradicting the principles of a well-functioning market. Amazon ceased using the algorithm in 2019, for reasons that remain unclear, according to WSJ sources.

FTC spokesperson Douglas Farrar urged Amazon to disclose more information by removing redactions and allowing the public to gain insight into the full scope of the alleged monopolistic practices.

Amazon’s spokesperson, Tim Doyle, defended the company, asserting that the FTC’s accusations misrepresented the purpose of “Project Nessie.” Doyle stated that the project aimed to prevent price matching from leading to unsustainable, abnormally low prices and that it was used on a limited range of products before being discontinued.

In response to the FTC’s lawsuit, David Zapolsky, Amazon’s senior vice president of global public policy and general counsel, argued that the FTC misunderstood the workings of retail markets. Zapolsky contended that matching low prices from competitors did not result in higher prices, as claimed by the FTC, and that such an outcome would be anticompetitive and detrimental to consumers.

The FTC’s complaint emphasized Amazon’s desire to maintain the perception of offering lower prices than its rivals. Still, it alleged that Project Nessie was designed specifically to discourage other online stores from undercutting Amazon’s prices.

The FTC, in a press release, stated its intention to prove that Amazon was suppressing competition on price, among other alleged harms to consumers. The FTC asserted that Amazon’s actions impacted a significant portion of the retail market, involving hundreds of billions of dollars in sales, hundreds of thousands of products, and over a hundred million shoppers.

Stacy Mitchell, co-director of the Institute for Local Self-Reliance, expressed concern about the manipulation of prices by dominant online firms using algorithms. She emphasized the need for policymakers to address this issue.

Luc Rocher, a lecturer at the Oxford Internet Institute, believed that the FTC’s complaint validated earlier predictions that dominant firms could manipulate pricing algorithms to the detriment of consumers. Rocher’s group called for further study and regulatory guidance on algorithmic pricing to ensure transparency and accountability in online markets.

In summary, the FTC’s lawsuit against Amazon alleges that the company employed a secret algorithm, Project Nessie, to manipulate pricing algorithms of competitors and maintain a monopoly. The case raises important questions about the role of algorithms in online markets and the need for regulatory oversight and transparency.